Regulatory: How to play by the pay-to-play rules

It used to be that personal political activity was personal, as long as it did not involve company resources, and corporate political activity was corporate. Companies that do business with state and local governments, however, often can no longer make this distinction because of the ever-growing list of federal, state and local pay-to-play laws. These laws, which often apply to contributions given both by the company and by certain senior employees, restrict contributions that may be made and often require additional detailed disclosures.

These pay-to-play laws come from a variety of sources. A number of states have enacted them in response to various scandals involving awards of contracts to companies that were politically active. Many of these contracts involved investment management services, so the Securities and Exchange Commission (SEC) has issued its own pay-to-play rule. Ironically, this federal rule generally restricts contributions to state officeholders (or federal candidates who are current state officeholders).

If your company has contracts with state or local governments, you should be certain to understand the applicable rules for your jurisdiction, put in place a compliance program and be certain to file necessary disclosure reports. Because of the look-back period on these rules, companies should undertake these efforts if they have plans to bid on state or local contracts.

With that background, we now provide 10 tips to keep in mind when the company or its employees consider contributing to a political candidate or organization:

1. Determine which laws apply

When determining whether an activity is permitted, an easy mistake is to look only at the federal rules, but this is not enough. Pay-to-play regulations exist at all levels of government and can differ significantly from jurisdiction to jurisdiction. Some apply to different employees, and some even apply to an employee’s spouse or family members. There is no way around doing your homework and carefully reviewing the rules in place for each potentially relevant jurisdiction. At the very least, this will include any state or locality with which the company does business or has plans to do business.

2. Determine which candidates are covered

The pay-to-play rules vary significantly in the candidates to which they apply. Some cover only the specific candidate that can award a contract, and others apply more broadly. The SEC’s rule—as well as a number of state rules—even applies to candidates who are one step removed from the contract if they appoint the members of the committee or board that makes the contract determination.

3. Determine which employees are subject to the rule

The SEC’s rule applies to “covered associates,” which are certain senior executives, as well as employees who have responsibility for obtaining the contract with the state. State laws often include individuals who own a certain percentage of the company, directors and even family members of those employees. The rules also will often include contributions made directly by the company (where otherwise allowed under state law) and by PACs operated by the company. Sometimes the rule will apply to PACs that are operated by employees otherwise subject to the rule.

4. Think beyond political contributions

Pay-to-play regulations can restrict things other than just monetary contributions. A broad range of activity, including hosting a meet-and-greet, employee fundraising for a candidate and even having an employee volunteer his or her time for a candidate can trigger a violation. In addition, contributions to noncandidate entities—even 501(c)(3) charitable organizations—can sometimes violate a pay-to-play regulation. So, when thinking about whether an activity could fall under a pay-to-play rule, think broadly and consider more than just political contributions.

5. Consider disclosure requirements

Various legal entities have different donor disclosure requirements. For example, contributions to individual candidates, leadership PACs, national committees and 527 organizations are disclosed while contributions to 501(c)(3) and 501(c)(4) organizations generally are not disclosed. If a donor wants to avoid public disclosure, the donor should ensure that any contribution is made to an entity that does not disclose its donors. In addition, many state and local pay-to-play laws impose additional disclosure obligations. Disclosures may be done through the campaign finance system.

6. Remember in-kind contributions

Certain expenditures (money spent hosting an event for a candidate) and activities (volunteering) can be considered an in-kind contribution to a candidate under certain circumstances. Employees should check with their compliance officer or outside counsel before spending significant money holding a fundraiser, traveling for a campaign or volunteering significant amounts of time on a campaign, because in-kind contributions may be subject to the pay-to-play limits as well.

7. Fundraising

Many pay-to-play rules apply not only to contributions given, but also to contributions solicited by covered personnel. Thus, you will need a system to monitor whether covered employees may host fundraisers or even allow their names to appear as host committees for candidate events.

8. Develop a comprehensive policy

Every company with state and local contracts should have a document that sets forth the company’s policies with respect to political and charitable contributions. Everyone should sign a document certifying they have read the policy and agree to follow the identified procedures.

9. Pre-clear contributions, solicitations and contribution forms

One of the best defenses against an inadvertent violation is to have the firm’s compliance department and/or outside counsel review the company’s and covered employees’ political and charitable contribution before the check is mailed or delivered. Employees also should speak with the compliance department before they agree to solicit contributions or fundraise on behalf of a candidate or political entity.

10. Train employees

The company must push out the policy to employees who are subject to the rules so that they know to pre-clear contributions and other activity. The training will have to involve some sensitivity, because employees will, for the first time, have their personal political activities subject to corporate oversight.